Democratic Republic of Congo : the sale of the century

The IMF has warned the DRC that its new barter deal with China – money for investment in infrastructure in exchange for mined minerals – may jeopardise a crucial agreement on debt relief

par Colette Braeckman,
septembre 2009

Yu Jian and Jeng, young Chinese engineers, are not having a good time. Stuck all day on the road above the port of Matadi, the capital of Kongo Central province, their faces burn in the sun, despite their straw hats. Sometimes in the early morning they find snakes coiled in the ditch at the side of the road. They often have to negotiate boulders, wade across streams or, worse, grapple with local bureaucracy. But nothing will stand in the way of their mission : to lay a fibreoptic cable across the Democratic Republic of Congo (DRC).

Their boss, “Hunter” Xie, the local representative of China Intertelecom Constructions, a subsidiary of China Telecom, has similar determination. He has only taken seven days leave in the three years he has been in the DRC. He plans to use his salary of $1,500 a month to pay for the education of his only son back in China.

The cable is part of the West Africa Cable System, originating in South Africa, which will run from Muanda on the Atlantic to the capital Kinshasa, where it will go along the river as far as Kisangani before joining another cable which has come from the Indian Ocean : a total of 5,650km. Installing fibreoptic cable, capable of transmitting sounds and images at the speed of light, is a significant technological leap for the DRC – a country as big as western Europe, with few roads but many mobile phone masts. The cable will reduce the cost of mobile calls and allow financial transactions over the internet, the transmission of medical images, and distance learning.

Locals, however, are less interested in surfing the net than in having access to clean drinking water ; they would like not to have to light their homes with candles because all the energy from the Inga hydroelectric dams is being sold to neighbouring countries.

The Congolese government has invested $85m in the cable project, which is being administered by its office of post and telecommunications. The first instalment of $31m has come from a development aid loan from the Chinese government. The loan stipulates that private telephone companies pay a cable connection tax (which could raise $100m a year) to the government.

The companies are resisting : Vodafone is claiming the right to control the cable entry point in Muanda, arguing it was the first to invest in the DRC’s mobile phone sector and has four million subscribers. It doubts the Congolese are capable of managing the opportunities the cable provides. Xie disagrees. He says that while 2,500 Congolese workers are currently being supervised by 80 Chinese, 20 Congolese engineers are being trained in China and will be able to supervise the second phase of the works.

While they dig in Matadi, in Kinshasa giant stone crushers make hardcore for the foundations of the capital’s new roads, and hundreds of diggers wait to go into action. Commissioned by the local governor, the Chinese have transformed the main thoroughfare, 30th June Boulevard, into a fast four-lane motorway. Western companies are arguing over the contracts the DRC signed with China, but work has already started. Every week President Joseph Kabila opens a new building site.

Barter deal

The minister of public works Pierre Lumbi (who founded the Peasant Solidarity Association in the 1980s) made a discreet visit to Beijing in 2007. The result was an agreement with China for $9bn investment to develop infrastructure and revive the mining sector. A joint venture, Sicomines, was created ; DRC holds 32% of its shares. Two huge enterprises, China Railway Engineering Corporation and Synohydro Corporation, are to build or restore 3,000km of roads and railways, 31 150-bed hospitals, 145 health centres, four universities and 50,000 units of social housing. These commercial loans also give access to Chinese development aid, which is repayable at very low interest rates over a long term.

It is hoped these works will help revive DRC’s economy, ravaged by three decades of dictatorship and 10 years of plunder and civil war. In return, the Chinese will be given access to 10m tonnes of minerals : 6.5m tonnes of refined copper, 200,000 tonnes of cobalt and 372
tonnes of gold.

This is a barter deal that will benefit both parties, Lumbi insists, but the Chinese will not pay until they have made sufficient profit : the infrastructure projects will be financed from the mining venture, with an audacious rate of return set at 19% (to be assessed by China alone). If this rate is not reached, the Chinese will demand supplementary concessions.

Some Congolese believe bartering infrastructure for minerals makes corruption and embezzlement more difficult. The rise in the price of copper just before the financial crisis caused a stampede of the world’s largest mining companies into Katanga. Huge sums of money were paid and then embezzled by underpaid officials, meaning the state budget benefited by a mere 6%.

Disappointed by the performance of western companies, Kinshasa decided to revise its mining contracts, at the same time as it looked to China. There is room for everyone, the Congolese proclaimed. Some see the revision of existing contracts as a manoeuvre to make room for new players. The US company Tenke Fungurame, which invested $1.7bn in Katanga, was targeted, with Kinshasa asking for its stake in the company to be raised from 17% to 45%.

But the DRC’s traditional “friends”, such as Belgium and France, who were trying to end the war and convince the international community to support the elections, felt bitter. They suspected Congo’s natural resources were going to help the development of China, plus India, South Korea – and Brazil, which is involved in oil exploration. The minerals include rare or strategic uranium, niobium, coltan and cobalt. And there is the recently discovered oil.

‘Odious debt’

It is difficult not to make a connection between the renegotiation of contracts and Kinshasa’s long disputes with the IMF. When Kabila came to power in 2002 he faced a disastrous situation : Kinshasa had stopped paying interest on its debt, and it owed the Paris Club $10bn, nearly 90% of which was interest accumulated since the last debt accord agreed in 1989. There were repayment programmes and visits from IMF experts, and Kinshasa hoped that by 2006 it would reach the mythical “completion point”, when creditors can cancel around 80% of debt.

The stakes are high : if the debt negotiations fail, the full amount will have to be repaid. The state spends around $600m a year servicing its debt, out of an annual budget of $5bn. There is no money to provide free healthcare, to pay the salaries of teachers, civil servants, judges, or the soldiers on peacekeeping duty in the east of the country. There is no money to rebuild the country.

This foreign debt is blocking recovery and deserves to be termed “odious” [1]. It is derived from loans agreed by the west to bolster the regime of their “friend”, the former president Mobutu.

The Congolese authorities thought they had seen the light at the end of the tunnel. But now the IMF is citing the deal with China, and bad management of public finances, as an obstacle. The day after the DRC signed the “contract of the century” with Beijing [2], the IMF confirmed its opposition to the cancellation of the DRC’s debt if it agreed loans of that size, or gave state guarantees to commercial contracts signed with Chinese companies. Dominique Strauss-Kahn’s institution sees bartering as unorthodox and suspect.

“We have asked for only one guarantee,” says the Chinese ambassador to Kinshasa, Wu Zexian : “That the state permit us to prospect for new mineral deposits if existing deposits do not allow us to honour our commitments. It is China’s state bank, China Exim Bank, that will be taking all the risks.” He adds : “Anyway, even if the mines are not enough, Congo has lots of other natural resources to barter, for example, land.” He says the state guarantee, which some say is a new form of debt, will only be used in the last resort : “The IMF is acting in bad faith. Its officials even went to Beijing to dissuade us from signing this deal. It is ironic when China is being asked to refinance the IMF to the tune of billions of dollars” [3].

A compromise was suggested when Strauss-Kahn visited Kinshasa last May : that for a few years at least the DRC do without one third of the $8.5bn of loans it has been promised to finance the second phase of infrastructure development, to be repaid from the mining project profits. Already China has taken a step back, and French businesses have moved in – the Paris airport authority will renovate the N’Djili airport serving Kinshasa (the Chinese are content to resurface the runway), and the French state-owned nuclear power company Areva has been given the rights to prospect for uranium and exploit any deposits.

It is vital for the DRC to make up with the IMF and the Paris Club : economic growth in 2009 was just 2.7% compared with 8.2% in 2008, and foreign investment reached only $807m instead of the expected $2.4bn. Strauss-Kahn acknowledged that the DRC was one of the African countries most affected by the financial crisis, and that in March the IMF had approved an urgent loan of $196m to make up for a lack of liquidity.

The remission of debt has become more of a political issue than an economic one. Many doubt a solution will be found immediately. The US, preoccupied with the renegotiation of the contract with the Tenke Fungurume mining company, is hiding its own intransigence behind the decrees of the IMF.

P.-S.

Translated by Stephanie Irvine

Colette Braeckman is a journalist with the Belgian newspaper Le Soir

[1] Odious debt is used to describe a debt incurred by a despotic regime, which is not in the interest of the nation ; it is argued that it should therefore be repayable by the members of that regime and not by the nation.